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Politics of tax compliance

Part of the debate regarding the 2017/18 Budget is the creation of the Revenue Authority of T&T. It is a proposal first put forward under the Patrick Manning administration of 2007 and came to the fore in 2009. It is also a measure which—at various times in the past eight years—I have supported through my writings in this space.

Through all the debate and discussion there are fundamental issues that have not been addressed over the period. These fundamental issues are more relevant today than they were back in 2009 and a failure to understand them may have significant political implications.

It is clear we have a problem with tax compliance. It should also be clear that those who are non compliant are not ghosts.

The non payment of taxes represents a windfall return for those who do not pay. That then translates into greater retained earnings which, in a small society such as ours, translates into greater power and influence.

It means, therefore, that the problems with the existing system of tax compliance and collections are not present by accident but there are deliberate reasons for things being the way they are.
In the very first budget under the People’s Partnership we were told then that if everyone paid their taxes we would have no deficit.

Based on the current presentations that may very well be true today which means that a significant portion of our recent increase in debt to GDP could be attributed to a lack of tax compliance.

The Revenue Authority has been touted as the solution to the problem and, to some extent, administratively it can be.

However, there are two other issues that the Revenue Authority, by itself, does not address and which needs to be factored into the mix.

Tax loopholes

The first is the question of tax loopholes.

For a third budget in a row, the Minister of Finance has spoken about the issue of transfer pricing by energy multinationals and the leakage that occurs through this process.

It is quite a simple exercise for many of the business entities domiciled in T&T, especially those that are not under scrutiny by being publicly listed, to engage in similar transfer pricing shenanigans with the resultant effect being tax leakages.

Just as the energy sector companies that are being questioned in the budget are currently compliant under existing tax regulations so, too, many businesses in T&T with the means to effect their own offshore structures can be tax compliant under existing regulations. But that does not mean that they are making an equitable contribution to the national economy.

Bear in mind that many businesses in T&T have grown up initially through protected local markets followed by support and tax breaks to develop external markets and, most recently, support for foreign exchange.

The bottom line is: there continues to be many initiatives to support the business sector in T&T as there should be.

If we are talking about sharing the burden then the issue of tax loopholes is as important as compliance with the existing tax code.

Further, I would suggest we recognise that the best form of tax compliance and the plugging of tax loopholes comes from a company being publicly listed.

Private sector, family-owned entities are very reluctant to share ownership, however, appreciate that a tax or foreign exchange concession is essentially a benefit conferred by the State on behalf of the citizens of T&T.

Voluntary compliance

Back in May of this year while writing on the property tax issue I made the point that in a democracy taxation at its core is a system of voluntary compliance. The less voluntary the system of compliance the more expensive it is to administer.

We can see this first hand with the so-far eight-year battle to transform the system via the Revenue Authority and the failure to collect what is due except through the many tax amnesties that have been offered from 2009 to now.

People will pay their taxes voluntarily when they perceive they are getting value for money. It is no coincidence that the countries with the highest tax rates globally also have the best level of public services.

It is not the high taxes that pays for the public services. Those who hold to that view have the natural order in reverse. It was the commitment to a high level of public services in the first place that opened the door for higher levels of taxation thereafter. If that were not the case and taxes came before service delivery then in a democracy the Government that oversaw that mismatch would soon be voted out of office.

The lack of compliance with our tax code is, in my view, very much a function of the poor level of public services experienced by the citizens.

A public simply says they can spend their money more efficiently than the State or to offset the failures of the State and so chooses to keep what is due to the State.

If we are going to change that dynamic without a significant and lock step increase in the quality of public services available to the average citizen then you will find a heightened level of anger and frustration amongst citizens.

There is a political dimension to the issue of tax compliance that needs to be addressed just as urgently as the introduction of The Revenue Authority.